COMMITTEE OF PUBLIC ACCOUNTS díospóireacht

Chairman

Witnesses should be aware that they do not enjoy absolute privilege. As and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 granted certain rights to persons who are identified in the course of the committee's proceedings. Those rights include the right to give evidence, to produce or send documents to the committee, to appear before the committee either in person or through a representative, to make a written and oral submission, to request the committee to direct the attendance of witnesses and the production of documents and the right to cross-examine witnesses. For the most part, those rights can be exercised only with the consent of the committee. Persons being invited before the committee are made aware of those rights and any person identified in the course of proceedings who is not present may have to be made aware of them and provided with the transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interest of justice.

Notwithstanding that provision in legislation, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. Members are also reminded of the provision under Standing Order 156 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome everybody here this afternoon. I invite Mr. Tuohy to introduce his officials.

Mr. Brendan Tuohy

We thank the committee for inviting us back so soon after our last appearance. The EU Presidency is starting next month and we have a very tight schedule so we appreciate the opportunity to appear now. Ms Sara White is the deputy secretary general, Mr. Niall Ó Donnchú is the principal officer in the communications development division, Mr. Brendan Hogan and Ms Kathleen Magennis are from the finance unit and Mr. Michael Guilfoyle is the assistant secretary in charge of the maritime transport, inland fisheries, mining and forestry directorate. Mr. David Hurley and Mr. Paul Byrne are principal officers for Vote control in the Department of Finance.

Chairman

I invite Mr. Purcell to introduce chapter 8.2.

Mr. John Purcell

Chapter 8.2 of the report of the Comptroller and Auditor General reads:

In my 2000 Report, I referred to the acquisition in 1999 by the State of large bandwidth capacity by way of a 25-year contract with Global Crossing Ireland Ltd (the company) for a significant block of fibre-optic communications links to a number of European cities and New York. The cost of the contract, which was subsequently re-negotiated at no extra cost, to include connections to other cities in Europe, the USA and Asia, was €77,140,24072. The project was designed to ensure availability of state-of-the-art competitively priced international connectivity to facilitate the development of Ireland as a significant centre for e-business. Connectivity was achieved by way of two submarine telecommunications cables landed in Wexford and terminating at an international high-speed bandwidth exchange (telehouse) in CityWest Digital Park in Dublin. The Government Decision approving the project, provided for the State to transfer to third parties its rights and obligations under the Agreement with the company on an investment recoupment basis. On foot of this, the State offered the capacity acquired, 160 STM -1s73, to the Irish market, as a result of which, contracts to a value of €80,784,124 were agreed with 6 telecommunications operators for the sale of 154 STM-1s. Payment was to be made in stages up to December 2002. Government approval of the project also provided for a proportion of the capacity to be made available for public interest and strategic initiatives in areas such as education and research.

The Department of Communications, Marine and Natural Resources (the Department) has responsibility for the project, which is managed through an inter-Departmental /Agency Task Force. Funding for the project is channelled through the Vote for Enterprise, Trade and Employment and IDA Ireland, which is also responsible for making payments under the supply contract to the company and for the collection of revenues due in respect of the onward sale of capacity. At the date of the 2000 Report, a balance of €23,287,620 was due to the company in respect of the supply contract.

At that time, as a result of financial difficulties experienced by certain telecommunications operators, only capacity-sale contracts with four companies were active. These were in respect of 73 STM-1s and had a total value of €38,440,500. However, by 2001, the companies were falling behind with their payments for the allocated capacity.

The 2000 Report concluded that, while the primary objective of providing large capacity bandwidth with low cost connectivity had been achieved, the contractual arrangements for on-selling the capacity were not satisfactory. Specifically, it stated that bonds and guarantees should have been obtained and it recommended that outstanding instalments from purchasers should be vigorously pursued. It also suggested that any reduction in the demand by telecommunications operators or further difficulties in the execution of contracts would have serious implications for the State recouping its €77m investment.

The Department contended that the project's economic and commercial value to the country should be measured over its 25-year life span and that difficulties encountered in recouping investment should be viewed against the backdrop of the very considerable global downturn in the technology and telecommunications markets, something which could not have been foreseen at the time. It pointed out that the project had been managed very tightly and had been instrumental in attracting and retaining a number of prestigious international investment opportunities in Ireland. It also stated that it would shortly undertake a value for money review of the project.

Supply Agreement

In January 2002, the parent company, Global Crossing Inc, and a number of its subsidiaries became subject to Chapter 11 proceedings in the USA in order to restructure their debt profile. Initially, the Irish subsidiary was not party to this process. It continued to provide the contracted supply and invested in the Irish network by constructing a second point of connectivity at Ballycoolin, Dublin, at a cost of €4m. Contract enhancements and price reductions were also negotiated during this period. In September 2002, the Irish subsidiary became subject to the Chapter 11 proceedings. In light of legal advice received and proposed improvements to the contract with the company, the final instalment of €7,762,540 in respect of the supply contract, was paid by the State on 16 December 2002.

The Accounting Officer informed me that the Irish subsidiary was still subject to the Chapter 11 process in the USA but the company continues to provide international connectivity per the Agreement. He stated that in order to protect the States investment, the Department had recruited US legal advisers and Irish counsel to monitor developments in the Chapter 11 process and to advise the Department and IDA Ireland on the appropriate courses of action. Among the significant improvements negotiated to the original contract was a wider more flexible product range and an option to request that the company transfer the Irish Ring 74 to a Special Purpose Vehicle (SPV). The Minister, IDA Ireland or a nominee may exercise an option to acquire this SPV in the event that the company is unable to meet its debts, fulfil its obligations under the agreements with IDA Ireland and the Minister or go into liquidation. These options would be exercisable subject to Government approval in the event of the companys liquidation.

The State did not exercise its options to purchase additional STM-1s or to purchase or lease dark fibres on the submarine cables.

The Department commissioned consultants to carry out a review of the Agreement with the company. Some shortcomings from the States point of view were identified and a number of recommendations were made in regard to future dealings with the company.

Sale of Capacity

It had been envisaged that the State, having acted as a facilitator in the provision of low cost bandwidth to the Irish market, would withdraw from the project having sold on capacity to telecommunications operators. Following the downturn in the global economy and the consequent fall in demand for connectivity, 80 unsold STM-1s remain in the ownership of the State.

The unsold STM-1s are reflected in the financial statements of IDA Ireland, where their net book value has been reduced from €24.1m at end 2001, to €3.1m at end 2002.

The Accounting Officer informed me that the Department and IDA Ireland had recruited a sales agent to sell unsold capacity on the Irish market but no further sales had ensued. He stated that it was intended to use some of the remaining capacity for national strategic purposes as appropriate.

Collection of Outstanding Debts

There have been difficulties in collecting moneys due on foot of the sales of the 73 STM-1s to four telecommunications operators. Although the main debtor made an agreed payment of €12.1m (VAT inclusive) in April 2003 in full and final settlement of amounts outstanding, the other debtors whohave outstanding bills totalling €12.9m (VAT inclusive) have been slow to settle their accounts. TheAccounting Officer informed me that IDA Ireland has commenced legal action to recover the moneys owed.

VFM Review

The Department commissioned a firm of consultants to conduct a study on the impact of the project vis-à-vis its original objectives and its direct and indirect impact on the Irish market.

It found that the project had achieved its objectives notwithstanding adverse market developments, but that gross costs to the State had exceeded original levels targeted due to a lower take up by the private sector. It arrived at this conclusion having noted the following:

Changes in the External Environment

Increases in the supply of interconnectivity since 1999 combined with weaker than expected demand had led to overcapacity. As a result, prices had fallen by more than the 20% per annum that was projected.

As well as the Global Crossing group being subject to Chapter 11 proceedings, there had been a dramatic fall in the value of telecom companies and a number had gone bankrupt.

The Cost of the Project

The likelihood was that the State would secure a lower than targeted take up by the private sector resulting in a significant direct cost to the State. This had also been the case for private sector investors in other telecom infrastructure internationally. In this case, however, there had been benefits to the State in terms of achievement of specific objectives of the project.

Effectiveness of the Project

The project had led to a significant increase in capacity and had contributed to achieving the objective of reducing the price of connectivity. The key industrial policy objective was to provide an important element of infrastructure in order to develop Ireland as an e-commerce hub in Europe and to encourage high-tech international companies to locate in Ireland. The achievement of this objective had been affected by adverse developments in the external environment. However, available data suggested that growth in the period to 2001 had been positive in those sectors that are large users of interconnectivity. Information from surveys carried out by the consultants had suggested that most respondents believed that the project was important in achieving a range of industrial policy objectives.

Cost efficiency

In determining the level of cost efficiency achieved, the consultants accepted the importance of global rather than regional or European connectivity. This was confirmed by its research with leading companies and industrial development agencies. It believed that the necessity for Government intervention to incentivise operators to provide such connectivity should have been examined more comprehensively and explicitly as part of the planning process. It suggested that it would have been preferable for the State to have entered a joint project where all risks were shared between the public and private sectors as originally envisaged, but it understood that this did not prove to be feasible. The fact that the project had the potential to result in costs for the State was clear because of the uncertainty regarding demand. In the circumstances, the issue for Government should have related to whether the benefits of lower prices and other industrial development benefits had been sufficient to justify the costs. Except for this reservation, the consultants were of the opinion that the project represented good value for money.

Future prospects

The consultants' assessment was that while the demand for international connectivity was slow, growth prospects were positive. The prospect of significantly better performance depended on a pick up in Information Communications Technology (ICT) growth, the development of Ireland as a relatively attractive location for e-commerce, and the development of new applications. Under the most likely scenario, there was sufficient interconnectivity capacity for the foreseeable future.

The Accounting Officer said that the project achieved its stated objective of providing sufficient levels of competitively priced international connectivity for the ICT sector in Ireland. He stated that perhaps a more rigorous ex-ante evaluation could have been conducted but, in light of the timescale involved, the Department and IDA Ireland needed to move quickly and that if the Department and IDA Ireland had not acted when they did, there would be a real risk that Ireland would be without sufficient levels of competitively priced international connectivity with all the ramifications that that would have for the Irish economy. He also stated that the project remains a very important factor for IDA and Enterprise Ireland in retaining existing high technology companies and attracting high profile international operators to Ireland as evidenced by the recent decision by a leading internet company to locate in Dublin.

The purpose of this part of the chapter is to bring the committee up to date on an issue raised in my 2000 annual report, that is, the acquisition of a large block of fibre optic communication links to a range of European cities and New York which have since been extended to other cities around the globe, and the subsequent sale of that capacity to the telecommunications operators. The State paid Global Crossing Ireland Limited €77 million for the capacity, the last instalment of which was paid in December 2002. As members are aware, the parent of the Irish subsidiary became subject to Chapter 11 proceedings in the US in January 2002. In the meantime the Irish company has been similarly enjoined. This process is ongoing and clearly creates a measure of uncertainty about the continuity of supply which will depend on the nature of the outcome of the Chapter 11 proceedings. In the event that the outcome is not benign, the degree of protection of the State's interests contained in the supply contract with Global Crossing will undoubtedly come under scrutiny.

On the other side of the coin - the sale of the capacity - the State managed to sell on only half of the available capacity. The slowdown in the global economy with the consequent fall in demand for connectivity and an oversupply of capacity changed the business environment from that pertaining when the capacity was acquired. This factor also had implications for the collection of outstanding instalments from the companies to whom the capacity was sold. At the date of my report, €12.9 million was overdue from three companies.

The committee will also note that after I last reported on the matter, the Department commissioned a value for money review of the project. The consultants concluded that the project had met its primary objective of providing sufficient levels of competitively priced international connectivity for the ICT sector in Ireland. It had one reservation, that it would have been preferable to have an arrangement whereby the risks could have been shared between the State and the participating telecommunications operators including a more thorough ex ante evaluation. The consultants were of the opinion that the project represented good value for money.

Mr. Tuohy

We have circulated a statement which I will go through quickly. In late 1998 it was clear to the then Department of Public Enterprise and to the IDA, that the lack of competitively priced international connectivity was a barrier to retaining existing companies involved in the information and communication sector and to develop the sector to further inward ICT investment in Ireland and to the development of a wider and inclusive information society. Many companies were curtailing their level of investment in Ireland arising from this. The Department established a high level advisory committee on telecommunications to evaluate the options open to it and to address this international connectivity deficit. This committee recommended that a competition be held to attract providers of high-speed international connectivities to the country.

In 1999 a contract was signed with Global Crossing Limited following a competitive process to improve greatly the levels of competitively priced international connectivity to Europe and to the US. The contract provided 25 year indefeasible rights of use on 160 STMs - an STM is 145 megabits per second - and options on dark fibre, which is unlit or pure fibre. I can explain that later if anybody has questions. The contract provided for 160 STM1s and that options on dark fibre should be made available to the State at a fixed cost of €77.48 million. A total of 48 of the STM1s were to New York and 112 STM1s were to 24 locations across Europe. To deliver this capacity the company constructed two submarine cables from Ireland to connect to its global network. The company was also obliged to construct two international points of interconnectivity in Ireland and these have since been constructed at City West and Kilcarbery in Park West, Dublin.

The IDA and the Department initiated a sales process to transfer this capacity to the Irish communications sector and, consequently, to the greater economy. Initially, demand for the capacity exceeded availability but, arising from the economic downturn, two of the original bidders, Formus and Connect Intelligence, ceased to trade and contracts with communications companies for 73 STM1s are in place. The IDA is in the process of collecting outstanding debts.

The IDA and the Department hired a sales agent in 2002 to assist in the marketing and sale of the remaining capacity and to position it to key inward investing companies. The sales agent is in negotiations with a number of parties to finalise sales of further high-speed capacity. A number of amendments to the original contracts were negotiated and the original capacity may be packaged as short-term leases, not only 25 year IRUs. Currently, 2.5 Mb. wavelengths and Internet protocol products are available. Sub-STM1 products, that is, products less than 145 Mb. per second, can also be sold. In addition, the operation and maintenance costs of the capacity have been reduced significantly and, under the terms of the renegotiated contract, will be reduced by an aggregate of 78% for European routes and an aggregate of 67% for transatlantic routes by September. The reach of the network has been increased and connectivity to additional European, US and Asian cities is available. In all, more than 50 cities internationally are covered by the connectivity contract at no additional cost to the original contract.

The original contract may be looked on as a procurement of three complementary elements as follows: first, two diverse and direct links to global Internet backbone networks; second, the construction of two world-class points of interconnection in Dublin; and, third, the procurement of a suite of broadband products on a high-speed global intercity network, at prices which in 1999 were orders of magnitude below prevailing market rates.

Ireland is one of the cheapest locations in the world for international leased lines. The cost equivalent to getting 1 Mb. to New York is now in the region of €100 per month and Ireland is the second lowest priced economy in the OECD for international lease line capacity. In successive renegotiations with Global Crossing, the IDA and the Department has secured the flexibility to resell the capacity at current rates and in a form that the market demands, that is, short-term leases as distinct from long-term IRUs.

The project was also designed and pursued to promote investment in strategic and research related initiatives. Seven STM1s have, therefore, been assigned to the national education research network, HEAnet, for strategic and educational research purposes. A further nine STM1s have been reserved for HEAnet to draw down as required. This enables the organisation to co-operate with UKERNA, the UK research network, and also provides links to StarLight in Chicago and to Internet 2, the new research project for next generation Internet being driven by the US Government.

The international connectivity project remains an important factor for the IDA and Enterprise Ireland in retaining and developing the existing base of ICT companies and attracting high-profile international operators to Ireland. This has most recently been evidenced by a major search engine's decision to locate in Dublin - Google. As a result of this project, approximately 50,000 sq. ft. of data centre facilities has been built in Dublin. Companies such as Telecity, Interexion, Global Voice/Metromedia, Serve Centric - formerly Worldport, Data Electronics, Colt, MCI as well as Eircom and Esat have all invested in state-of-the-art data centres. There is increasing evidence that Ireland is becoming a location of choice for data management and outsourcing and for disaster recovery sites. This investment is enabled by the availability of competitive, high-speed international bandwidth.

Despite the global economic downturn, the ICT sector continues to play a critically important role in Ireland's economy. The sector employs more than 93,000 people in more than 4,000 enterprise companies, up from 47,000 in 1993, and foreign-owned companies provide more than 55,000 of these jobs. The ICT sector accounted for about one sixth of employment in manufacturing and 8% of employment in the service sectors in 2001. Turnover in the ICT sector was more than €51 billion in 2001, two thirds in manufacturing and one third in services. The ICT sector represented approximately a quarter of total turnover in the manufacturing and service sectors. Value added in the ICT sector, at €1.1 billion, accounted for approximately 18% of total value added in industry and services.

Ireland is the third largest exporter of software in the world and seven of the world's leading software companies have a base in Ireland. One third of all PCs sold in Europe are manufactured in Ireland. Ireland is the fourth most successful country in the world in attracting foreign direct investment and the largest in Europe for software. Total exports of ICT products and services amounted to €31 billion in 2001 representing 33% of all exports.

According to CSO data published this week, turnover per employee in the ICT sector is higher in Ireland, at €489,000, than in any other EU member state. Turnover per head is 40% ahead of its nearest challenger, Finland, and it is more than twice the UK figure. Ireland ranks as the sixth fastest growing exporter, with Ireland's top three exporters - Dell, Microsoft and Intel - accounting for 18% of total exports in 2001. Output of ICT products and services was equivalent to almost 16% of Ireland's GDP in 2001. This increased by 18% per annum over the period 1993-2001, twice the rate of overall GDP growth.

The indigenous software sector currently employs 18,000 people, compared with 3,000 people in 1992. Exports by the indigenous software sector increased by 28% in 2001 and amounted to €1.4 billion. The top ten ICT companies in Ireland employ more people now than they did at the beginning of 2000. Overseas ICT companies make a significant contribution to corporate tax receipts - €350 million in 2001. Turnover in the sector in 2001 was €51 billion, up from €35.9 billion in 1999. The number employed directly by Global Crossing in Ireland has more than doubled to 70 over the last two years.

I refer to the Indecon report and independent evaluation. The Department acknowledges the project achieved its stated objectives of providing sufficient levels of competitively-priced international connectivity for the ICT sector in Ireland. Perhaps a longer, more rigorous ex ante evaluation could have been conducted but, in light of the timescale involved, the Department and the IDA needed to move quickly. A day is a long time in this business and the Comptroller and Auditor General referred to this. We felt we could not do things we would have liked normally to have done. Following the global economic downturn, no new cables are being constructed and it is not anticipated that there will be construction of such communications infrastructure to Ireland in the foreseeable future. If the Department and the IDA had not acted when they did, there would be a risk that Ireland would be without sufficient levels of competitively-priced international connectivity with all the ramifications that that would have for the economy.

The sector, as evidenced by the statistics to which I referred, is too strategically and economically important to the country to be complacent and it was imperative that the Government intervened in the way it did to maintain and foster economic prosperity and create jobs. The returns to the State from this project cannot be viewed solely in accounting terms. If this were merely a construction project, then it would be viewed as an unqualified success as it came in on time and on original cost.

The impact and return must, however, be viewed in broader economic development terms and a lifetime overview of the project must be taken. It has an expected useful life of 25 years or more and I am confident the original investment will be repaid manifold over that useful life. If the project were at full capacity now, we would have fallen short of the overarching objective to future proof our international capacity. There is little point in providing key infrastructure for the next year when the challenge is to provide it into the next decade.

The manner in which the product set embedded in this project has kept pace with international developments and with current market pricing, ensures its continuing relevance going forward in maintaining our pre-eminent international position on interconnectivity. If we were looking for a similar project on today's market, it is unlikely that takers would be forthcoming. There is also a view that projects of this scale could only be procured during the boom and the challenge right now is to leverage this project in helping the Irish ICT sector to weather the global market downturn.

With regard to the debts outstanding, the role of the Department is to chair the interagency steering committee from a strategic broadband point of view and to assist in debt collection. In the year to date, the debts outstanding have been more than halved. To date in 2003, approximately €13.7 million has been collected leaving debts outstanding of approximately €11 million, excluding VAT. Through the IDA, we are continuing a policy of aggressively pursuing the remaining late payers and proceedings have now been initiated in all cases. While I have no wish to prejudice those debt collection efforts, it bears mention that some of the debt outstanding matured at the end of 2002 and that all of the debt has not been outstanding for a period of years. We still own all the assets and, while there are disputes, the assets are still in our ownership.

Chairman

Is there another supplier of high-speed connectivity, besides Global Crossing Limited, in Ireland?

Mr. Tuohy

There is now. Individual companies have their own suppliers. Eircom has always had but, subsequent to us doing the deal, a company called 360 Network did the Hibernia link from Canada to Ireland and that is still there. Ireland has one of the highest levels of interconnectivity at that level. It is competitively priced and that is showing through. The OECD table on competitively-priced interconnectivity places Ireland first or second.

Chairman

How do both suppliers compare in terms of capacity?

Mr. Tuohy

The other supplier is purely transatlantic. However, Ireland is a bridge between the US and Europe. We distribute to Europe and more and more of the distribution is going digital. It is, therefore, not only sufficient to have connectivity to the US as a country, and Ireland must connect to Europe and beyond. The Global Crossing deal has allowed to us to extend the number of cities all the time. The second company came on stream after Global Crossing. The problem at the time was we were faced with a situation in which the economy had been built up and ICT had been a major contributor to growth in the 1990s. However, there was a serious risk we would lose that because companies based here, both indigenous and multinational, wanted not only competitively-priced interconnectivity, but also choice.

I recall the discussions with the telecommunications companies at the time. They said they could provide for any company that came to Ireland but that was not the issue. The issue was when Ireland was viewed on the global stage, was it future proofed. We did not have future proofing and the decision to spend £60 million at the time was a strategic decision, which said, "If we want to be in this business into the future, we have to take the decision now." Thankfully, we did because no other sub-sea cables are being done and none will be done for the foreseeable future. The value of the sub-sea cable sector has reduced from €200 billion to €2 billion in less than five years because of oversupply following the Internet boom. Companies will not invest but if we had not invested at the time - and we did not foresee the future - we would now have a country where we would not have the level of capacity that we have.

Chairman

I am not taking from the merits of the potential involved, but from a business perspective, it was extraordinary that the State took 100% of the risk and the private sector took none. Were there performance bonds on the three companies that owe the Department money? If not, why not?

Mr. Tuohy

The Chairman has raised a number of issues. At the time, speed was of the essence.

Given the scale of the ICT sector and its contribution to the economy, if we had lost any of the major companies, we would not only have lost that company because these companies tend to hunt in packs. When one comes, the others come. Earlier this summer, Google announced it was coming to Ireland and was followed by eBay and so on. They watch what the others are doing and critical mass is built around clusters. We are clustering around that.

Together with the IDA, we were in the US in the late 1990s examining the next generation of industry that would come to Ireland. When we sought to locate the Internet industry, the companies said they located where the data centres were and they go where the connectivity is. If Ireland did not have connectivity, it would not have data centres. We got the connectivity and within 18 months there were up to 500,000 sq. ft. of data centres here, all privately funded. The market turned, over which we had no control. The data centres remained. A number went into liquidation and were sold but they are still in use. Ireland is in position going forward to have the capability in the economy.

With regard to sharing the risk at the beginning, the bottom line is speed and was more important to us at the time. We had to weigh up the two. The companies had an arrangement were they felt they had sufficient capacity and none was prepared to take the bigger country perspective. This raises a fundamental issue about the role of the State in a modern economy. This was an occasion when the State took a strategic decision, rightly, to do it and then sell on to other companies. The clock was ticking on this and some of the multinationals based in Ireland were looking to the future. There was interest from the companies and, when we were doing the negotiations, we did not have the luxury to do it sequentially. We negotiated with the companies and we were oversubscribed for the initial offer. Then the downturn came and some of the companies went to the wall, which was unfortunate, but we then sold on to the other companies, some of which then ran into problems. Their debts matured at the end of 2002 as we handed over connectivity to them and a number were not able to come up with the money.

This led to a tight balancing act. Did we want to put the squeeze on these companies when we wanted them here into the future? We realised they were in a difficult position. We have been negotiating with them since. We did deals with some, we called in the bond on one company and we are pursing others through legal channels. A mixture of arrangements are in place. We had to give companies an opportunity. They were faced with major problems and we had to be reasonable while, at the same time, we had a backstop knowing that we would take legal action.

Deputy Noonan

I thank Mr. Tuohy. Will he outline the chain of command? Officials from the Department of Enterprise, Trade and Employment appeared before the committee recently and the indebtedness arising from this project was reflected in the Department's appropriations-in-aid. The IDA was the principal actor. What is the link between Mr. Tuohy's Department, the Department of Enterprise, Trade and Employment, and the IDA?

Mr. Tuohy

We set up a team and we envisaged we would do the deal ourselves. When we got to the stage of signing of contracts and we examined the vires of the Minister on this, it was felt, on the basis of legal advice, there could be a problem on the vires going forward for the Minister to do the contracts. During discussions with the Department of Enterprise, Trade and Employment and the IDA, it was felt it would be safe for the IDA to do that. We were intimately involved in driving this from day one and we have worked with the IDA, Enterprise Ireland and the Department of Enterprise, Trade and Employment. The IDA had the vires to do it. Questions may have been asked about the Minister’s vires and, rather than get into a conflict, it was felt the IDA should do the contracting. That was how that originated. It was all above board and cleared by the Government.

Deputy Noonan

It more or less began with the decision that led to the formation of an expert advisory group. Who was on it?

Mr. Tuohy

We had a mixture of people from abroad. It was chaired by Brian Thompson. Various Taoisigh have held meetings with various industry people in the US around St. Patrick's Day when an informal group of people is invited to chat with the Taoiseach. Some were in the ICT sector.

Deputy Noonan

The American Ireland business group?

Mr. Tuohy

They comprised an informal group, but they were very helpful and conscious of the danger we might lose out in that area. They were keenly interested to see the country continue to succeed. They identified, as we did in our own discussions with industry in the States, that it was an area where, if we failed to take action, we could find ourselves playing catch-up. That was what brought it to a head. They reported that the best way to do it was an open tendering process, which is what we did.

Deputy Noonan

What was the level of examination of Global Crossing before it was selected?

Mr. Tuohy

Four different companies applied, and we went through the full, rigorous process. At the time we were not the only government, since there was the US Government too. I do not know if the Deputy is familiar with the Global Crossing situation, but there was an effort on the part of Singapore Technologies Telemedia to take it over. Even recently, the American Government had difficulty with the concept of so much of its country's traffic being on Global Crossing. We were not the only government to be involved in that. We are now almost at the stage where, we believe, Global Crossing will be out of chapter 11 within days. That is the feedback we have from the system. We knew that other governments, including the US Government, were involved and that it would ultimately not allow it to go to the wall. That was part of our view, and we have probably been proven correct in that. It is a very important element for global connectivity, but it got caught in the Internet bubble. Telecommunications pricing, as we all know, dropped dramatically. As I said, at the time the sector was valued at over €200 billion, and it dropped to €2 billion in a short space of time. Overcapacity in the system for underwater cable, along with the broad economic and telecommunications downturn, was to blame.

Deputy Noonan

Would it be oversimplifying matters to say that the State entered into a contract with Global Crossing for €80 million or so——

Mr. Tuohy

It was €77 million.

Deputy Noonan

Global Crossing provided the hardware, and then the State agency sold that on to private sector telecommunications companies.

Mr. Tuohy

At the time, we also had expressions of interest from the industry. It was never involved in day one. We were oversubscribed at the time, because the market here was growing dramatically, as were the prospects. It is correct that we did not have legal contracts with them, but if the Deputy examines the history of the matter, he will see that we had more interest here at the time than the 160 STM1s that we purchased.

Mr. Noonan

Why was it necessary to have the State act as an intermediary if there was such demand?

Mr. Tuohy

To get the companies to collaborate together on it was impossible. None of the companies would do it. That was not how they did it. As I said, one of the lessons I have learned over the last few years is that, even in liberalised markets worldwide, there is still a role for the state. The traditional paradigm, where the State opts out and lets the market decide what to do, is not absolutely correct. The markets themselves have limitations, and governments still want to take action and do things to facilitate competition, which is what this has done. It has brought competition. The State is not a player, since it is not running the telecommunications system. We are doing a similar thing now with the metropolitan networks on a more localised basis, something with which some Deputies will be familiar. The State is taking a role. The redefinition of that role in the modern economy is very important. It is not simply a case of opening up and liberalising markets, standing back and doing nothing. We are learning what that role should be and debating part of that at the moment. It is a very important role, and that showed us that the State acted as a catalyst. The State made the purchase. It did not predict the downturn before it happened, but no one else did either. If we had done so, we would probably not be sitting here today.

At the same time, this is a long-term, 25-year investment. We have already seen the flexibilities that we have been able to negotiate on this. If one considers the scale of the ICT sector here and weighs up the risk and reward, one will see that not to have taken that risk would have put the majority of that sector in doubt, with the consequence that we could have had a very serious situation.

Deputy Noonan

On the STMs that were sold on to private sector companies, how much money is now owed?

Mr. Tuohy

At the moment the sum of €11 million less VAT is owed to us by the different companies.

Deputy Noonan

What are the prospects of recovering that?

Mr. Tuohy

We have our legal people dealing with that now. We have got more than half of the outstanding money this year already. We are quite confident that we will get whatever is necessary.

Deputy Noonan

What about the value of the STMs that were not sold on?

Mr. Tuohy

They are in our ownership.

Deputy Noonan

I saw in the last report of the IDA that it had written their value down from about €23 million to €2 million.

Mr. Tuohy

That is quite normal. As the Deputy will appreciate, one writes the value down. However, there is currently a global economic upswing, particularly in the ICT sector. If one looks at the quarterly returns for the major ICT players, one sees that there is a very positive direction. One now sees that situation with Google and eBay. We are also dealing with some others whose names I cannot divulge. However, those companies are now being attracted to Ireland, and not simply for what was here in the past. The availability of this capacity is the single most attractive feature for them. Let us take the required 25-year perspective on this. I hope that, sitting here in a few years, we will be able to show the Deputies something more positive. We cannot currently do that, but not to have it and to envisage an exit of companies from Ireland at the moment is such a grave risk that it would be wrong not to take action, and that is the reason we acted as we did.

Deputy Noonan

For our purposes on this side of the table, let us establish the bottom line. The sum of €11 million is outstanding, and the IDA has written down the value of the capacity which it did not sell on to the private sector by around €20 million. The bottom-line position is that around €31 million or €32 million has been lost.

Mr. Tuohy

No, writing it down is one thing, but the fact that it is still there to be sold is another issue. It is prudent accounting. With respect, that is an accounting issue, but the capacity is still there in our ownership. We believe that, as the market picks up, it will be made available. As I said, we may be doing this again in a few years, or even sooner, depending on the uptake. We have already seen tremendous interest this year and sold some of this capacity. We have something to market and sell now. It is an asset there to be sold. The accounting treatment is one thing, but the capability going forward is another issue. From an accounting point of view, the IDA did what was absolutely correct in writing it down, but now that the market is picking up, Deputies will see a very different view on that.

Deputy Noonan

We may or may not. If I might rephrase that, the State is attempting to collect a further €11 million which it is owed. That is the first item of loss. The second issue is that there was capacity which the IDA, representing the State, did not sell. According to the IDA, the value of what it still has to sell is about €2 million rather than €23 million. That is the position. It is not just accountancy.

Mr. Tuohy

The value at a given point in time is related to what one perceives to be the value. Given the value of the telecommunications sector when this was going on in 1999, that of the sub-sea cables was €200 billion. Within three or four years it was €2 billion. At the time, if one had been valuing those assets on one's balance sheet, one would have done so on that basis. That is prudent accounting in my view, but it does not alter the fact that we still own the STMs. We have not lost the ownership. That is what I am saying.

Deputy Noonan

I see what Mr. Tuohy is saying, but if I were so optimistic about prospects, I would be running out to buy broadband shares during my lunch break. Of the capacity that was taken up by private sector telecommunications companies, does Mr. Tuohy know what proportion is in use? How much is lit up? Is it just lying there fallow?

Mr. Tuohy

A significant amount of the capacity out of the country is on Global Crossing. As I said, the issue here is about the types of companies we are trying to attract. What we are trying to build on the economy is the next generation of technology. These people look to the companies. It is a massively mobile market. Companies, particularly multinationals in this business, can move very quickly, as one knows. One has to give them some certainty going forward. What we have gives certainty on capacity going forward. We will not be stung for capacity in the future. We have that. This is the future proofing and we have it at the right price. This is very important. We have already seen a third of our capacity in use on Global Crossing. That is increasing. Some of the newer companies we are talking about come in here. That too will increase dramatically. These are huge users of capacity.

Deputy Noonan

That does not quite answer my question. Mr. Tuohy said that a third of our traffic out of the State was on Global Crossing. I am asking how much of the Global Crossing capacity is in use.

Mr. Tuohy

There are about 55 of the STM1s in use at the moment.

Deputy Noonan

There are 55 sold on to private sector companies. There is a suggestion that the company designed and built to total overcapacity, and that even though the STMs have been purchased by telecommunications companies, they are not in use.

Mr. Tuohy

We were oversubscribed for the STMs at the time. All the companies at that time were predicting the usage. If I were to provide a chart of activity going forward, it was on an exponential curve at the time. Then came the downturn. The Internet bubble burst, and there was change. When people were projecting ahead, they were prepared at the time to contract into this. As I said, some of the companies subsequently went to the wall. We sold the capacities on to the companies we dealt with, and they are using it. I cannot say how much they are using as I have not got the figures, but we know what we have sold on to them. I do not know how much of their STMs they are using.

Going back again to the idea of over-building, when one is dealing with a 25-year deal of this type, and if one believes that in the Irish economy, the ICT sector will be critical, and that bandwidth and demand for it will be critical for the future, it would be absolutely wrong of us in such a situation to have limited ourselves for the future. We were dealing with two submarine cables, something not done lightly, as all the attendant business of ships and so on must also be dealt with. As we have found out, it is unlikely there will be another submarine cable put down in the foreseeable future, because the oversupply is global. If we had not opted at the time for the capacity, we could find ourselves limiting ourselves into the future. It was a conscious decision to go for a long-term plan. We thought at the time that we could sell it on and that did not materialise because of the downturn. It is still there, in our ownership, and it is a key selling point for the IDA and Enterprise Ireland - particularly for the IDA.

Deputy Noonan

The companies that owe the State €11 million are reputable companies. One of them is Chorus. It is headquartered in my part of the world and is a subsidiary of Independent News and Media plc. As I understand it, these companies are not paying because they are not using what they bought.

Mr. Tuohy

True.

Mr. Noonan

It is quite clear that a lot of the capacity is now left with the IDA. I have been advised that capacity cannot currently be given away. That is why the IDA wrote down the value from €23 million to €2 million. That is just part of the sum. On the other side is the fact that the companies which purchased and owe money, are not using the capacity. I would like to know, possibly by means of a letter, what proportion of the capacity is being used for the purpose for which it was designed and constructed.

Mr. Tuohy

I will have to get that information from the companies. Once we sell on to the companies, the deal is then between them and Global Crossing. We do not get involved.

Deputy Noonan

In the argument between the IDA and the companies, is this the net issue, that they are not paying because——

Mr. Tuohy

There is more to it than that. The companies contracted to buy something from us, and they did not predict the downturn either. The downturn hit them, so they are saying they have not currently got the predicted usage for the capacity. They would prefer not to have to buy it now, even though they have contracted. We have negotiated with some of them, and have called in the bond on the company about which the Deputy is talking. We have begun legal proceedings and so on.

It would be a nice arrangement from those companies' point of view if the State could continue to hold the capacity for them and dole it out when they need it, but they had a contract with us, and we are enforcing the contract.

Deputy Noonan

That is not the issue I am pursuing. The view taken in 1999 of the capacity needed was clearly very extravagant because there is a proportion of it still left unsold with the IDA, and of the amount sold, only a small percentage is in use.

Mr. Tuohy

In 1999 it was strategic and certainly ambitious from the point of view of looking to the future, but it was so fundamental to the Irish economy that not to have gone ahead would have put at risk the whole ICT sector. Broadband is to the future what grass is to agriculture. Broadband is what the economy of the future will be built on. If we did not have that capacity and did not purchase it at the time, we would not have it today.

Deputy Noonan

Does Mr. Tuohy think the private sector would have provided it?

Mr. Tuohy

It was not prepared to do so at the time, when we needed it. There was then the real risk that if we did not have it, and decisions were made by some of the existing players in Ireland, we would have seen an exit from the country of some of these companies. Once they start going they travel in clusters, and when one goes, they all go. That is the balancing act——

Deputy Noonan

Did the international company, 360 Network, land the cable in Dublin in 2000?

Mr. Tuohy

It did.

Deputy Noonan

That was a transatlantic cable, involving a private sector operation without a shilling of Irish taxpayers' money.

Mr. Tuohy

Absolutely correct, but one must remember that the multinational sector in Ireland is not routing just into the United States but also from the United States into Europe. The kind of activity going into the European capitals is equally important if not more important than on the transatlantic side. We are a hub between the two.

Deputy Noonan

The 360 Network company was connecting to the United States, and to Europe through the UK. They are providing a reasonable capacity of interconnectivity.

Mr. Tuohy

They started into our process, and then pulled out, saying they would go it alone.

Deputy Noonan

That is exactly the point I am making. I am suggesting there were private sector companies who looked at the IDA project and said they would go it alone. They did not ask the Irish taxpayer for a shilling, but went ahead and put in a transatlantic cable, which is working. They are connecting North America to Dublin and going on through the UK into the main European cities. If a reputable company was prepared at the time to act on its own and do it all on its own, was the State intervening in grandiose schemes in which it had no business?

Mr. Tuohy

No. When we were discussing this at the time, with the companies in Ireland, I think four companies tendered for the contract. There comes a time when the State must make a decision. If something is strategically important, can we leave it solely to the private sector to do? If one goes back over the history, there was no commitment given on delivery times or anything like that. The companies made decisions. They talked about getting involved in the process on day one, then opted out and decided to do it themselves. They got their own backers and investors.

It is not the same model. We can provide the comparison between what they provide and what we provide, or what Global Crossing provides. What we specified at the time was built around what the economy needed going forward, linking to the United States and to an escalating number of European cities, and to Asia and so on, which is where we are trading into. The timeframe for delivery shows how soon the Global Crossing set up came through. Once the Government got involved and was able to give that commitment to the industry, the IDA was then able to go out and market it, bring in some of the companies noted, and maintain the relationship with the existing companies.

There is still a role for the State in a modern economy. I suggest that no matter how liberalised the markets are, the industry, and in particular the multinational players, look to the State as the backstop, and believe that if the State is backing something, it will happen. The best aspect of our history in industrial development has been that the State picked certain areas over the years, has set out to perform certain tasks and stuck to its word. In this case it maintained the existing companies that are here, and allowed us to build on that.

Deputy Noonan

Mr. Tuohy's description of the state of the information technology industry in Ireland and the key role it plays in the economy is very impressive. I was looking at the OECD report on broadband penetration published in June 2003. Ireland is ranked 25th out of 31 countries. How does that fit?

Mr. Tuohy

That is the national rather than international table of the two tables to which the Deputy is referring. We are at the top of the international table.

Deputy Noonan

I realise we are high up in the international category.

Mr. Tuohy

We are in the top two.

Deputy Noonan

In terms of broadband penetration, we are not doing very well.

Mr. Tuohy

On broadband penetration, we liberalised the market in 1998. We believed liberalising the market would facilitate private sector development of the necessary infrastructure and services. Subsequently, there was a global downturn in the telecoms market and shareholders took a different perspective on rates of return, namely, a three year perspective. The demographics in Ireland are such that to get a return in the roll-out of broadband could take five to seven years. The problem was that a lot of private sector shareholders took the view that they wanted a return in three years which meant they would only invest where they would get a return in that period. Therefore, there was a roll-out of DSL, digital subscriber line, the current introductory broadband technology, in higher density areas. What we have been trying to do is support competition in these areas and take away the barriers to entry by means of State intervention in the domestic market to drive the process through the metropolitan area networks in towns and cities. This goes back to the issue I mentioned, that there is a legitimate role for the State, even in liberalised markets, to facilitate and help competition where it can take a longer term perspective on rates of return than the private sector tends to do.

Deputy Noonan

Set against Mr. Tuohy's accurate description of the IT industry in Ireland, we have to take into account the fact that the OECD rates us 25th out of 31 countries in terms of broadband penetration. It goes on to state the penetration rate in Ireland is 0.41 per 100 inhabitants, whereas our neighbours in the United Kingdom have a penetration rate of 0.63. The figure in the United States is 8.25 and in Korea, 23.17. The report, set against claims that we will be the e-commerce centre of Europe, does not square up.

Mr. Tuohy

There are two elements to define. Because of the Global Crossing deal, technology companies here are absolutely above board in saying they do not have a problem in getting the right price for connectivity. It is not an issue.

The second side of the equation is the broader general economy in the roll-out to and use of broadband in ordinary homes and SMEs. In what we perceived to be a market failure - private sector companies were not prepared to take the risk and accept a longer term rate of return - the Minister issued a policy direction to ComReg, the telecoms regulator, about the availability of broadband, particularly flat rate Internet access. Both we and the Minister strongly believed that unless there was flat rate Internet access, there would not be an uptake of broadband, as long as the clock was ticking and the meter ticking.

The figures from the OECD, published during the summer, were historical. If Deputies look at the figures for the end of September from ComReg, they will see there was a dramatic uptake, mainly as a result of the introduction of a flat rate and more aggressive marketing of ADSL and broadband. Our figures are now growing at a rate of about 1,000 a week. Some 30,000 have signed up for the flat rate Internet access and there are 22,000 digital subscriber lines. The OECD figures are, therefore, dated. We can make available the more up-to-date figures published at the end of September by the regulatory body.

We realise there is a critical point in uptake - a few hundred thousand - when one begins to see the benefits. People are not prepared to commit unless they know the fixed cost and what they will be paying in the future. We have also seen, as they use broadband or DSL, that they look for higher and higher speeds. That has been the experience so far.

Deputy Noonan

A more recent report, the World Economic Forum's Global Competitiveness Report, states that in terms of competitiveness, Ireland has moved from fourth position in 2000 to 30th this year principally due to the failure to roll out broadband. The report is not historical, it was published in October.

Mr. Tuohy

Because of the initiatives taken by the Minister during the year we have seen a massive uptake in the use of broadband. As I said, we identified a limitation in the broadband market and intervened.

Some Deputies will be very familiar with the roll-out of broadband in the metropolitan area networks and the impact this is having. Ira Magaziner, who some Deputies will remember carried out the Telesis report in the early 1980s, gave us a handout on the matter last year. He was senior policy adviser to President Clinton and opened up Internet access in the United States. It is interesting that in his meetings with some of the local authorities he said he had never come across such a level of knowledge of the importance of broadband and the surrounding technical issues as he had found in Ireland.

We have been working with the local authorities in performing an educational role. As we roll out the metropolitan area networks, there will be a massive uptake of support. As Deputies will have seen in the media, we have been in discussions with the industry about the introduction of broadband in schools, in the broad sense of making it available at a very low costs if not free, on the basis that it will drive uptake in the community, which is very important for the future.

Deputy Dennehy

There are three immediate issues that jump out at us - there is the question of design of the network's capacity, the prospects of collecting the sum of €11 million, and the IDA's accounting practice. Mr. Tuohy must think, "I am damned if I do and damned if I don't". It is not all that long ago when members of the committee were questioning the reason the M50 had not been designed to the new standards required. I appreciate, however, that in this case these are submarine cables that cannot be widened. On what was the information based that led to the decision to allow for the volume in question?

Mr. Tuohy

It was based on our discussions with the companies which potentially would be involved, our broad analysis of future trends based on our experience of the use of bandwidth, and our general discussions with the industry about its future plans. As I said at the time, if the Deputy remembers, we had an interest in covering more the 160 STMs about which we were talking. The industry, once it knew what we were doing, decided it wanted to be part of it. While we did not predict the downturn, demand for bandwidth use is still on the same exponential curve; the timescale has just been put back a little. We had a mixture of the advisory committee's best guess at what the future was going to be, our experience of the industry and predicted potential usage. There were some of the top companies in the world on the IDA list and database. In talking to the telcos they believed there would be an uptake.

Deputy Dennehy

Returning to a point made by Deputy Noonan, which was fair, there was a delay in the national roll-out of broadband. Should that have affected the programme now in place? Should it have started earlier? It appears that we are a little late.

Mr. Tuohy

When we liberalised the market on 1 December 1998, we all believed - there was no one who did not believe this - that it would deliver, not just in Ireland but also across Europe. What subsequently happened across Europe was that there was no delivery because of the downturn. The 3G licences offered in the main by Britain and Germany took a massive amount of money from the market with the result that we ended up in a situation where there was no money for investment. Companies started sweating their assets and made it clear they were not going to invest. If the members of the committee were to ask any of the companies what they saw as the future, they would say broadband. There is no doubt about this but if they could sweat their assets and get what they could out of them, why would they invest? The capital expenditure programme of any one of the telcos one could name almost dried up.

Governments see this process as being important. The Swedish Government invested €5 billion in a rural broadband programme. There is a recognition across the European Union that liberalised markets have limitations and that there is still a role for governments to facilitate and support competition but not to become telcos in the sense of offering retail services. We got out of that business but can help other players to do so.

Deputy Dennehy

Was there no EU restriction on such expenditure?

Mr. Tuohy

No. A decision was made by Commissioner Monti that allowed the French to do this, something along the lines of what we are doing with the metropolitan area networks. It is the same idea. We cleared it with Brussels.

Deputy Dennehy

I want to link two issues - the prospect of collecting the outstanding €11 million and IDA accounting. I am not sure whether I should erect a monument to Mr. Tuohy for his foresight or attack him for losing the State €33 million which I am sure will grab attention tomorrow. What are the prospects of collecting the €11 million outstanding? I appreciate that Mr. Tuohy does not want to prejudice other actions being taken.

Mr. Tuohy

In a sense, we have already taken in half of what we are looking for this year. We are involved in legal cases and believe we will collect the full amount. We have not lost €30 million. Let us be absolutely clear. We have the assets.

Deputy Dennehy

That is the second question I intended to ask. The story that will emerge tomorrow is that a sum of €33 million has been lost to the State. Will Mr. Tuohy explain about IDA practice in more detail, a matter about which Deputy Noonan asked some questions? As I previously underlined, this is net book value. We appear to have lost €21 million on the IDA section. I appreciate that we still have what we bought.

Mr. Tuohy

There are some very able accountants on the other side of the table. The bottom line is that at that point in time the accountants to the IDA decided that they had to put a value on this sitting asset. They decided to value it at X amount. This does not mean that that is what they judged its value to be. As we know in this field, value is related to the time and the outside market. That the value has been written down is one thing, we know we still have the assets which are there to be sold.

As we have already seen this year with the uptake in the market, there has been a dramatic increase in the negotiations we are having and interest in the asset. When first designed, we were selling STM-1s. We have since changed the whole suite packages in order that we could break it down. It does not have to be for a period of 25 years. We are selling on shorter leases which is what the market wants. In a market that is over-full, there is more supply than demand. One has to go and sell one's products.

We have not lost €30 million. I would hate people to think we have lost money. The fact that we have not sold it does not mean it is not ours. It is ours to sell. This has to be seen over a period of 25 years, not a year or two. Deputy Dennehy said - I totally agree with him - many of my fellow Secretaries General have been criticised for under-designing things in the past.

Deputy Dennehy

I know.

Mr. Tuohy

In a strategic investment one has to weigh up the issue of risk and reward. We have to ask, what is the risk if we get this wrong, if we under-design it? When laying submarine cables, one cannot just add a little here and there. One only does this once in a lifetime or, probably, once in a generation. If we had not got in at the time, we would not be able to do it today.

Deputy Noonan referred to 360 Networks which, I think, went into liquidation in 2001. It was out of commission for a year and then bought back. The American Government got involved in Global Crossing. It is using the Global Crossing network. That gives one certainty, a sense that it will not be let go to the wall.

Deputy Dennehy

Without going into the full details of the technology involved in broadband, is there any threat of obsolescence? One thinks of satellite and other technologies. How far ahead are we? New projects come on-stream every day.

Mr. Tuohy

Satellite is a competing system. Satellites depend on the frequency provided. The information is shipped on a restricted system of air frequencies. We have fibre cables which on one level are tiny. The wavelengths within the cables are used to carry information which effectively means that as the technology at both ends increases, there is unlimited capacity. The technology is improving dramatically all the time. Fibre will be absolutely critical for the quantities of material and bits we are shipping. It will not change. Satellite and wireless technology will be available at different levels but will not offer the same level of future proofing as fibre.

Deputy Noonan referred to Korea. I was in Japan and Korea with the Minister. In Korea it is very much a government-driven initiative. We asked how it was possible to do things so quickly. One reply was that they did not have to deal with democracy, that they were able to just do it because of the type of country it was. On the other hand, when we asked if they would do it differently in future, they said they would have gone straight for fibre. The Japanese went straight for fibre. In Japan one has 100 MB per second in homes. The demographics are different; there are lots of high-rise apartments and so on. That is where the competition is. We are faced with capability and driving high-speed bandwith availability in order that people can have it in their homes, SMEs and so on.

Deputy Dennehy

I made a note to ask if Mr. Tuohy would still advise on doing the same thing, with all of the information and difficulties encountered? His enthusiasm comes across. I do not understand the implications of the Chapter 11 proceedings in the USA which affects us because of the Irish company involved. What does it mean and how does it affect us?

Mr. Tuohy

Chapter 11 is the equivalent of examinership in Irish law. It means the company in question can continue trading. A number of companies, including Singapore Telecom, wanted to buy it. The possibility of China being involved caused concern because of security traffic. Negotiations are still ongoing in that regard as the US Government was not happy. From what we have been told, we expect the company will come out of Chapter 11 and return to trading again in the next week or so. Unfortunately, over the past few years, many of the companies involved in this business have gone, not just into Chapter 11 but into liquidation simply because of the downturn.

Deputy Dennehy

What is the position on bonding and insurance cover when we enter into deals with companies? Were we so keen to get people on board that we did not put any impediment in their way? Why did we not get a bond?

Mr. Tuohy

We did with some of them, and we called them in. There were different arrangements. We called in bonds in the case of Chorus to which Deputy Noonan referred. In addition, we have other elements of contracts to pursue. That is under way. The IDA legal team is pursuing this.

Deputy Dennehy

What are the main reasons for the failure to pay the €11 million outstanding? Is it a case of the wherewithal not being available or is the company questioning the performance of what has been supplied?

Mr. Tuohy

There are a number of issues. Deputy Noonan raised the issue of demand not going up as quickly as envisaged. They are saying they do not need it. Our argument is that they have a contract with us. I do not think anybody is questioning the performance, if Deputy Dennehy means the performance of Global Crossing. I have not heard anybody questioning it.

Deputy Rabbitte

I wish to clarify current usage. To what extent are the 55 STMs, in respect of which money is owed and which were disposed of to the private sector, in use?

Mr. Tuohy

Deputy Noonan also asked me that question.

Deputy Rabbitte

I know. What is the answer?

Mr. Tuohy

We sell them on. We do not get involved in their monitoring. I would have to get the figures from the companies involved.

Deputy Rabbitte

Mr. Tuohy's entire argument rests on the economic value. What traffic is being transferred by Global Crossing?

Mr. Tuohy

One third of all traffic in and out of the country is on the Global Crossing system. I do not have a breakdown of the figures for individual companies.

Deputy Rabbitte

Are any of the 80 STMs in the ownership of the IDA being trafficked?

Mr. Tuohy

No. The IDA has left them sitting unused but the others which have been given to the private sector are carrying about one third of the volume of traffic out of the country.

Deputy Rabbitte

Where are the other 25 STMs?

Mr. Tuohy

They are in place. They are the ones we have not used.

Deputy Rabbitte

The Comptroller and Auditor General's report refers to 80 STMs in the ownership of the State, 55 of which have been disposed of to the private sector.

Mr. Tuohy

HEAnet, the research network, had nine of the ones we sold on, with an option for a further nine. The rest are to be sold on. What we and the IDA are doing is endeavouring to sell them on to the telcos and some of the bigger players entering our market to which they are very attracted because we can now provide capacity. Companies such as Google which entered the market recently are massive users in terms of connectivity.

Deputy Rabbitte

Eighty of the STMs are not being used. We do not know what proportion of the 55 are in use. Therefore, is there not enormous spare capacity?

Mr. Tuohy

Absolutely. The Deputy must remember that when we put in place the 160 STM-1s and put in the order, this increased capacity in and out of the country by an order of magnitude of 15. This was a strategic decision. If one considered the relevant tables on the increasing demand for bandwidth such as that of the World Economic Forum, all predicted exponential growth; none predicted the downturn. Therefore, in trying to attract new companies or retain existing ones, one must bear in mind that they will highlight the demand curve and ask if we can match it. If we cannot, they will not stay here. This leads to the question of determining scale. Critical mass is needed when laying submarine cables. A submarine cable cannot be put in place for one STM-1. We said from day one that the capacity when we began was 15 times that then required. However, it was a 25 year investment. Any of the predictions at the time and even those of today indicate a massive uptake of bandwidth.

Deputy Rabbitte

I appreciate that. Although Mr. Tuohy is in a much better position to predict the level of capacity in the future, a very small fraction is being utilised as of today. He referred to the assessment of Global Crossing, a Bermuda based company. What assessment of the state of the company took place other than the meeting with the businessmen concerned and the Taoiseach around St. Patrick's Day? Is it just a victim of the downturn?

Mr. Tuohy

We did a full check of the technical, legal and financial elements, as we do for any company. It was deemed to be reputable. It was huge. The scale of what was involved——

Deputy Rabbitte

It is not in great odour in parts of the United States. Consider some of the magazine articles since the collapse of Enron, for example.

Mr. Tuohy

The Deputy is absolutely correct. Is he referring to corporate governance issues?

Deputy Rabbitte

Yes.

Mr. Tuohy

Worldcom-MCI and other companies were in a similar category. If the Stock Exchange Commission was not able to find out the relevant information on the company given its level of cover, it was, to be fair to us, unlikely that we would have been able to do so. We did what any company would do in doing such a deal - one checks the legal, technical and financial issues pertaining to the company and makes a call. One also has to see what organisations are using a company, and we had determined that the US Government and others were using Global Crossing. That Global Crossing is in but due to come out of Chapter 11, that it did not go into liquidation and is now in the process of being purchased by very reputable companies in Singapore, etc., suggests it is still to be reckoned with at a time when many other global companies in this field have gone to the wall.

Deputy Rabbitte

What was the reference Mr. Tuohy made to the contemplation of legal action? Was it in respect of the debts?

Mr. Tuohy

Yes.

Deputy Rabbitte

Is legal action in train?

Mr. Tuohy

We have initiated action in respect of all the outstanding cases.

Deputy Rabbitte

Is it possible to put any value on the bandwidth unused and in State ownership?

Mr. Tuohy

In the IDA accounts they have written down its value. That is prudent accounting and if it was not done, people would be asking other questions. While I am Accounting Officer - we are the people dealing with this - I explained the reason it ended up on the IDA balance sheets.

Deputy Rabbitte

As Deputy Noonan said, 360 Networks landed a transatlantic cable in Dublin in June 2000. I did not know until Mr. Tuohy stated it that 360 Networks had been a bidder in the tendering process. It pulled out because it wanted to embark on its own initiative.

Mr. Tuohy

While I do not want to put words into its mouth, I believe it did not like the public procurement process and that is why it opted out. It went ahead on its own.

Deputy Rabbitte

Why did Mr. Tuohy think it necessary to persist with the State initiative if a private company was prepared to embark on establishing the necessary international connectivity?

Mr. Tuohy

There were a number of issues involved. We had to guarantee we could deliver. I have outlined the size and importance of the ICT sector for the economy. This was not something with which we could play in the sense that if we were not able to guarantee we could deliver, there was a serious risk that we would see an exit of existing companies. Our advice was that we would not be able to attract others if this occurred. Therefore, we had to make some commitment to them. This would have led to some form of contract. 360 Networks had the opportunity to enter through the public procurement process but opted out. We had to guarantee we could deliver. More certainty was provided once the companies located here and other potential companies could see the Government was going to do this. As I stated, in spite of all the liberalised markets, there is a role for the State to play in certain areas, of which this is one. It is of strategic importance to the company.

Deputy Rabbitte

I can understand how heavily the future of the ICT sector would weigh on Mr. Tuohy's shoulders. If the advice he received was the best expert advice available to him, I accept it entirely. Nonetheless, what was being identified was a market failure on the part of the private sector to provide interconnectivity. One company Mr. Tuohy knew about was prepared to set about providing it. What has emerged is that we are left with bandwidth that one could not give away in today's market. Is it fair to say Mr. Tuohy believes this will not always be the case and that demand will pick up?

Mr. Tuohy

That is fair. We have seen it this year alone. If one considers how the sector is changing globally and ignores the downturn in recent years and the tough hiccup it represented, one will notice global demand for bandwidth is growing exponentially. This is true in the case of mobile phones and international bandwidth connectivity. At the time in question we were connected through the United Kingdom to the global Internet and did not have what is called tier 1 access thereto. We would not have been able to market the country.

Deputy Rabbitte

I am entirely persuaded of the necessity of ultra high speed Internet communications as an essential part of the economic infrastructure of the future. Given that we are swimming in unlit cable, how come we have the relative positions referred to in terms of the OECD rating and the separate economic assessment? Why do we not have better communications if we have unlit cable around the country and between here and the United States and Europe?

Mr. Tuohy

If one looks at the value chain in telecoms, there is international connectivity and backbone connectivity. Backbone connectivity is the national network which connects, for example, Dublin with Cork or Limerick. There is also a metropolitan area network that radiates from local exchanges, including the "last mile" from the exchange to homes and businesses.

The belief globally, not just in Ireland, was that there would be competition among infrastructure providers. We are at the top of the OECD table as regards international connectivity; we have the capacity and at the right price. As regards national connectivity, we have the capacity. While there is some competition, there is probably not enough.

Deputy Rabbitte

If it is at the right price, why are other companies not coming here and seeking to take up certain amounts?

Mr. Tuohy

While it is at the right place and available, it is designed into the future. One should remember that this is a 25 year investment. If I was able to fill it in the morning, the committee would ask me why I had under-designed it. The demand curve is growing exponentially. It is about putting the risk of not doing this against the value of the ICT sector to the economy. It is a figure of €77 million versus the scale of the sector - one third of our exports worth €33 billion. This is such an important issue that if we do not do it, we run the risk of ruining the economy.

Deputy Rabbitte

I understand the argument Mr. Tuohy is making. Against that backdrop of investment, how come we do not have the desirable level of communications? I met a businessman recently who had moved out of hotel X and into hotel Y as hotel Y was one of only three hotels in Dublin that could give him the rate of communications he needed to download data from the United States.

Mr. Tuohy

There are five elements, of which we have solved the international one. There is limited competition on the national backbone.

Deputy Rabbitte

Are the tariff rates at home part of the problem?

Mr. Tuohy

Let me try to explain it. The metropolitan area network is the ring around a town. We felt this was a stumbling block to development. Eircom, effectively, owned most of the metropolitan area networks and was not prepared to open them up to other players. Efforts by ComReg to open the local loop have met with tremendous difficulties. The final element is the service providers which will only come into the market if they see that all of the other elements are in place. Competition in the local loop has been difficult. Companies which had come into the market when it was liberalised suddenly found they had capital problems when investment was taken out of the sector.

Deputy Rabbitte

Is it correct to say we now have a duopoly instead of a monopoly?

Mr. Tuohy

No. There is aggressive competition in Dublin and other urban areas. The bigger users such as the multinationals do not have a problem. They are happy that there is a competitive market for them.

Deputy Rabbitte is raising the issue of the ubiquitous roll-out of broadband. There must be competition to drive it. There was a squeeze on capital with the result that competitors did not have money available to invest. In most other economies, cable companies were the first line of competition to the incumbent telecom companies. NTL purchased Cablelink at a time when there had been little investment in the company. It was sold for more than £500 million, an unbelievable amount of money. The downturn followed and NTL did not have money to invest in upgrading the network. Therefore, the cable company was not in a position to challenge the telecom company as had happened in other countries. We were then relying on other telecom operators to come into the market. While Esat started to build this up, it never went into the local loop and concentrated on big corporate users. It is much more difficult to compete in the local loop as to do so a company must take over the last mile from the incumbent. This has proved difficult in Ireland and every other country in Europe.

We opted for metropolitan area networks and are providing co-location facilities. This means that new exchanges will be installed and any new player will not have to go to Eircom. We are doing this in conjunction with the local authorities. We will then encourage competitors to use this infrastructure. The State will not be a telecommunications company; it will only facilitate competition.

Last year the Minister issued a direction on broadband and the availability of flat-rate Internet access. It has had a huge impact. I have given the committee the figures on the uptake which indicate there has been a dramatic increase. However, many still believe DSL pricing is high. I am sure the companies involved are thinking they must find a way of remunerating their capital and, therefore, seeking to keep prices high. If the infrastructure is not provided, the economy will be stymied. Therefore, a balance is needed. I talked about the role of the State in a modern economy. Even when it is liberalised, there is still a role for the State to play to facilitate and help the market. That is what we are doing.

Deputy Rabbitte

Does this mean that submissions made by companies like Axia are not being entertained?

Mr. Tuohy

There is an ongoing competition to manage the metropolitan area networks in which the company the Deputy named is involved. It would be highly inappropriate for me to talk about any single company.

Deputy Rabbitte

Is that competition still under way?

Mr. Tuohy

Yes.

COMMITTEE OF PUBLIC ACCOUNTS díospóireacht - Thursday, 27 Nov 2003

2002 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 30-Communications Marine and Natural Resources-

Chapter 8.2 International Telecommunications Connectivity.

Mr. Brendan Tuohy

Mr. John Purcell

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

Mr. Tuohy

COMMITTEE OF PUBLIC ACCOUNTS díospóireacht -
Thursday, 27 Nov 2003